The Kaesong North-South Korean Industrial
Complex
Dick K. Nanto
Specialist in Industry and Trade
Mark E. Manyin
Specialist in Asian Affairs
June 1, 2010
Congressional Research Service
7-5700
www.crs.gov
RL34093
CRS Report for Congress
P
repared for Members and Committees of Congress
The Kaesong North-South Korean Industrial Complex
Summary
This purpose of this report is to provide an overview of the role, purposes, and results of the
Kaesong Industrial Complex (KIC) and examine U.S. interests, policy issues, options, and
legislation. The KIC is a six-year old industrial park located in the Democratic People’s Republic
of Korea (DPRK or North Korea) just across the demilitarized zone from South Korea. As of May
2010, over 110 medium-sized South Korean companies are employing over 40,000 North Korean
workers to manufacture products in Kaesong. The facility has the land and infrastructure to house
two to three times as many firms and workers. If the master plan of Hyundai Asan, the co-
developer of the project, is followed the KIC eventually will be over 6,000 acres (nearly half the
size of Manhattan Island) and include high-technology zones, shopping districts, residential areas,
and facilities for tourism and recreation.
The complex has continued to operate despite a rise in tensions between North and South Korea
since early 2008. Indeed, the complex expanded somewhat during a roughly nine-month period
from November 2008 through August 2009, a period when North Korea took a number of actions
South Korea and the United States deemed provocative. As of early June 2010, the complex had
been excluded from the latest deterioration in North-South relations, which was triggered by the
March 2010 sinking of a South Korean naval vessel, the Cheonan. After a multinational
investigation determined that the ship had been sunk by a North Korean submarine, South Korea
announced it would cut off all inter-Korean economic relations except the Kaesong complex.
South Korea also said it would reduce by two-thirds the number of South Korean workers—
primarily government and business managers—at the complex because of worries about them
being taken hostage by North Korea. North Korea responded by expelling several South Korean
managers.
The KIC represents a dilemma for U.S. and South Korean policymakers. On the one hand, the
project provides an ongoing revenue stream to the Kim Jong-il regime in Pyongyang, by virtue of
the share the government takes from the salaries paid to North Korean workers. South Korean and
U.S. officials estimate this revenue stream to be around $3 million to $4 million per month. On
the other hand, the KIC is the last remaining form of cooperation between South Korea and the
DPRK, providing a possible beachhead for market reforms in the DPRK that could eventually
spill over to areas outside the park and expose tens of thousands of North Koreans to outside
influences, market-oriented businesses, and incentives.
The United States has limited direct involvement in the KIC, which the United States has
officially supported since its conception. At present, no U.S. companies have invested in the
Kaesong complex, though a number of South Korean officials have expressed a desire to attract
U.S. investment. U.S. government approval is needed for South Korean firms to ship to the KIC
certain U.S.-made equipment currently under U.S. export controls. The Korea-U.S. Free Trade
Agreement (KORUS FTA), which has yet to be submitted to Congress for approval, provides for
a Committee on Outward Processing Zones (OPZ) to be formed and to consider whether zones
such as the KIC will receive preferential treatment under the FTA.
This report will be updated as circumstances warrant.
Congressional Research Service
The Kaesong North-South Korean Industrial Complex
Contents
Developments from March 2010-June 2010 ................................................................................ 1
The March 2010 Sinking of the Cheonan .............................................................................. 2
The KIC and Inter-Korean Relations ..................................................................................... 3
Implications for U.S. Interests ............................................................................................... 4
The Development of the Kaesong Industrial Complex ................................................................. 5
Issues Related to the Kaesong Industrial Complex....................................................................... 9
Labor Issues.......................................................................................................................... 9
Financial Benefits for Pyongyang........................................................................................ 11
Kaesong and the Proposed Korea-U.S. Free Trade Agreement ............................................. 12
The Control of Exports to Kaesong ..................................................................................... 14
Long-Term Geopolitical and Economic Issues........................................................................... 15
U.S. Interests and Policy Options .............................................................................................. 18
Figures
Figure 1. The Kaesong Industrial Complex and the North-South Korean Border.......................... 2
Figure 2. Leased Space Factory Building to be Constructed in the Kaesong Industrial
Complex ................................................................................................................................ 11
Figure 3. Kaesong’s Potential Logistical Role............................................................................ 17
Tables
Table 1. Key Statistics for the Kaesong Industrial Complex ......................................................... 1
Table 2. Hyundai’s Original Concept of the First Three Phases of the Master Plan for the
Kaesong Industrial Complex .................................................................................................... 6
Table 3. Production by Category in the Kaesong Industrial Complex ........................................... 8
Contacts
Author Contact Information ...................................................................................................... 20
Congressional Research Service
The Kaesong North-South Korean Industrial Complex
Developments from March 2010-June 2010
he Kaesong Industrial Complex (KIC) is an industrial park located in the Democratic
People’s Republic of Korea (DPRK or North Korea) just across the demilitarized zone
T from South Korea. As of June 2010, approximately 120 medium-sized South Korean
companies were using North Korean labor to manufacture products there, employing over 40,000
workers. (See Table 1.) Currently, the park has much of the infrastructure (e.g., South Korean-
built water, sewage treatment, and electrical facilities) to enable the completion of the complex’s
first phase, an 800-acre site that would contain roughly 300 foreign manufacturers employing
around 100,000 North Korean workers. If the master plan of Hyundai Asan, the co-developer of
the project, is followed the KIC eventually will be over 6,000 acres (nearly half the size of
Manhattan Island) and include high-technology zones, shopping districts, residential areas, and
facilities for tourism and recreation. At present, over 100 companies that have signed lease
agreements to open factories have not done so. The complex was planned, developed, and
financed largely by South Korea, and it has become a symbol of engagement between the North
and the South. In 2009, about $900 million, or 56%, of the $1.6 billion in total trade between the
two Koreas was attributable to the KIC.1
Table 1. Key Statistics for the Kaesong Industrial Complex
End 2005
End 2006
End 2007
End 2008
End 2009
No. of South Korean
11 15 65 93 118
Manufacturing Firms
(Jan. 2010)
Approx. No. of North Korean
6,000 11,000 23,000 39,000 42,000
Workers
Approx. No. of South Korean
n.a. 700 800 1,500 960
Workers
Annual Production Value
$15 mil.
$74 mil.
$185 mil.
$250 mil.
$256 mil
Sources: South Korean Ministry of Unification documents.
This purpose of this report is to provide an overview of the role, purposes, and results of the KIC
and examine U.S. interests, policy issues, options, and legislation.
1 South Korean Ministry of Unification.
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Figure 1. The Kaesong Industrial Complex and the North-South Korean Border
The March 2010 Sinking of the Cheonan
In the spring of 2010, the KIC’s survival was thrown into doubt by a marked deterioration in
inter-Korean relations. On March 26, 2010, a South Korean naval vessel, the Cheonan, sank in
waters disputed by the two Koreas. Nearly 50 South Korean sailors died in the incident. A
multinational investigation team led by South Korea determined that the ship was sunk by a
North Korean submarine.2 South Korea, backed by the United States and Japan, has said it will
take the case before the United Nations Security Council. On May 24, 2010, South Korean
President Lee Myung-bak also announced that North Korean ships would no longer be permitted
to pass through shipping lanes under South Korean control, and that North-South trade, visits, and
exchanges generally would be suspended. Exceptions were made for humanitarian aid to infants
and children, and for the KIC. Propaganda radio and loudspeaker broadcasts into North Korea
would also be resumed.3 South Korean Minister of Unification Hyun In-taek announced that new
investments in the complex would be stopped and that the number of South Korean personnel at
the complex—which had often approached 1,000 people in mid-week—would be reduced by as
much as 50%.4
2 South Korean Ministry of National Defense, “Investigation Result on the Sinking of ROKS ‘Cheonan’,” May 20,
2010. The Joint Civilian-Military Investigation Group (JIG) included 25 South Koreans and 24 non-Korean civilian and
military officials from the United States, Great Britain, Australia, and Sweden. North Korea has called the
investigation’s conclusion a “fabrication.” Pyongyang Korean Central Broadcasting Station, “DPRK NDC
Spokesman’s Statement on ROK’s Sunken Ship Investigation Results,” May 20, 2010, as translated from the Korean
by the Open Source Center.
3 Office of the President of South Korea, “Special Address to the Nation by the President Lee Myung-bak,” May 24,
2010.
4 South Korean Ministry of Unification Press Release, “Announcement of Measures against North Korea,” May 24,
2010. In March 2009, North Korea closed the North-South border for several days, leaving hundreds of South Korean
workers unable to return home.
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North Korea’s Committee for the Peaceful Reunification of the Fatherland, the government organ
responsible for inter-Korean relations, responded by labeling the actions by the “puppet” South
Korean government as “a declaration of war against us” and announcing that it would abrogate all
North-South non-aggression agreements, terminate contact with Lee’s government, and
“completely halt” all North-South cooperation projects, among other steps.5 However, the
Kaesong complex was not shut down, although North Korea threatened to take this step if South
Korean loudspeaker broadcasts resumed. (It also threatened to shoot at the loudspeakers.) Instead,
several South Korean government workers at the KIC were expelled. South Korea did not restart
its broadcasts.
In other words, it appeared that both Koreas were reluctant to allow the complex to be closed, or
at least to be blamed for its closure. Aside from the park’s symbolic importance, both sides would
incur financial losses if it ceased operating. The KIC provides the North Korean government with
a constant revenue stream of between $3 million and $4 million a month, by virtue of the share
the government takes from the salaries paid to North Korean workers. The prospect of triggering
social unrest due to depriving families in the Kaesong area, with a population of around 200,000,
of high-paying jobs may also be a factor for the North Korean government, which already has had
to confront public discontent in late 2009 and early 2010 over a confiscatory currency reform. As
for South Korea, a closure could make the central government liable for hundreds of millions of
dollars in insurance payments to the South Korean companies that use the park. Although there
have been conflicting reports about whether South Korean manufacturers in the park are
profitable, it is possible that a number of them would suffer significant financial hardship if the
KIC were closed.
The up and down treatment of the Kaesong complex in the spring of 2010 fits the patterns that
have existed for the past two years.
The KIC and Inter-Korean Relations
The KIC is virtually the last vestige of the range of inter-Korean cooperation projects initiated
during the period of détente between South Korea and North Korea from 2000-2008. Relations
began deteriorating after new developments in both Koreas. In December 2007, a new,
conservative South Korean president, Lee Myung-bak, was elected. Lee’s administration
cancelled a range of large-scale infrastructure inter-Korean projects that his predecessor had
promised South Korea would finance, instituted a more “reciprocity-based” policy toward North
Korea, and was openly critical of human rights conditions in North Korea. Lee has linked
progress on a number of items in inter-Korean relations to North Korea’s agreement to
denuclearize.
Lee’s government has been ambivalent about KIC. On one hand, the complex has been physically
expanding since Lee took office. Under Lee, a number of steps have been taken to support the
KIC, including providing special tax breaks to small- and medium-sized enterprises that
outsource their manufacturing to KIC companies; allowing KIC companies to resell their lots
5 “Press Statement by Spokesman for the Committee for the Peaceful Reunification of the Fatherland [CPRF],”
Pyongyang Korean Central Television, May 25, 2010. Translated from the Korean by the Open Source Center,
KPP20100525104004.
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inside the complex; reducing health care premiums by 50% for South Korean workers in the
complex; and issuing new loans and trade insurance to KIC companies.6
On the other hand, the Lee administration has halted plans for a major expansion of the complex.
In October 2007, with the complex outgrowing the greater Kaesong area’s ability to provide
workers, Lee’s predecessor, Roh Moo-hyun, promised North Korea that Seoul would build
dormitories to house tens of thousands of new North Korean workers. Lee cancelled these plans.
It is unclear to what extent his government will link construction of the dorms to North Korea’s
behavior in nuclear talks and other diplomatic fora, or whether it will link the dorms to
developments within the park. For instance, many South Koreans want more provisions for the
safety of South Korean workers at the complex and to allow greater communication services
(such as cell phones, which currently are prohibited at the complex).
In North Korea, Kim Jong-il’s reported stroke in the summer of 2008 coincided with a more
bellicose and provocative stance, including the testing of a nuclear device in May 2009. For
roughly a nine-month period from November 2008 through August 2009, the North Korean
military appeared to be dictating policy decisions with regard to the KIC. During this time, North
Korean authorities imposed a number of restrictions on the KIC, including closing down the
border for several days in March 2009, effectively trapping hundreds of South Korean workers at
the complex. The restrictions are blamed for the decline in the complex’s aggregate production in
2009. The apparent reassertion of civilian control in the late summer of 2009—the time period
when Kim Jong-il is commonly thought to have reasserted his authority—brought a relaxation of
most of the restrictions. North Korea also stepped back from demands it had made that investors
dramatically increase wages and payments.
In the aftermath of Kim Jong-il’s stroke, reports began emerging that he was attempting to secure
his third son, Kim Jong-un, as his successor. Many North Korea-watchers attribute much of North
Korea’s behavior in 2009 and 2010 to Kim’s efforts to secure his son’s position.
Implications for U.S. Interests
The KIC represents a policy dilemma. On the one hand, as mentioned above, the project provides
an ongoing revenue stream to the Kim Jong-il regime in Pyongyang. On the other hand, the KIC
provides a possible beachhead for market reforms in the DPRK that could eventually spill over to
areas outside the park and expose tens of thousands of North Koreans to outside influences and
incentives. Expanding the park would exacerbate the dilemma: The regime would reap additional
funds, but bringing in workers from areas north of Kaesong could also enhance the park’s
potential to serve as a “Trojan horse” in the medium-to-long term. The original plans for the KIC
envisioned the complex eventually housing hundreds of foreign (i.e., non-North Korean)
manufacturers, employing hundreds of thousands of North Korean workers.
The United States has limited direct involvement in the KIC, which the United States has
officially supported since its conception. At present, no U.S. companies have invested in the
Kaesong complex, though a number of South Korean officials have expressed a desire to attract
U.S. investment. U.S. government approval is needed for South Korean firms to ship to the KIC
certain U.S.-made equipment currently under U.S. export controls. The Korea-U.S. Free Trade
6 South Korean Ministry of Unification, The Lee Myung-bak Administration’s North Korea Policy, May 2010, p. 45-52.
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Agreement (KORUS FTA), which has yet to be submitted to Congress for approval, provides for
a Committee on Outward Processing Zones (OPZ) to be formed and to consider whether zones
such as the KIC will receive preferential treatment under the FTA (see “Kaesong and the
Proposed Korea-U.S. Free Trade Agreement” below). The EU-Korea FTA, which was signed in
2009, contains a similar provision.
The Development of the Kaesong Industrial
Complex
The KIC resulted from an initiative led by the Hyundai Group beginning in 1998 that coincided
with the Republic of Korea’s (ROK) “sunshine policy” that attempted to improve relations
between South Korea and the DPRK. The KIC is located about 106 miles southeast of Pyongyang
and 43 miles north of Seoul just across the demilitarized zone (DMZ) in the DPRK. The purposes
of the KIC as stated by South Korea have been to develop an industrial park in which South
Korean businesses could manufacture products using North Korean labor, provide an opening for
North Korea to liberalize and reform its economy, and ease tensions across the DMZ. Although
begun primarily as a private sector venture, both governments are heavily involved in the project.
Groundbreaking occurred in June 2003 and again in April 2004. Hyundai Asan and the Korea
Land Corporation (both from South Korea) have been developing and managing the complex.
South Korean companies operating in Kaesong receive certain incentives from the ROK
government and have certain rights as determined by negotiated agreements with the DPRK. The
KIC is a duty-free zone, with no restrictions on the use of foreign currency or credit cards and no
visa required for entry or exit. Property and inheritance rights are ensured. South Korean law
breakers in Kaesong are not to go on trial in the North.7 The corporate tax rate is 10% to 14%
with an exemption for the first five years after generating profits and a 50% reduction for the
ensuing three years. The South Korean government (through its Inter-Korea Cooperation Fund)
offered companies that established their operations in the KIC (in the pilot project and first phase)
loans with low interest rates equal to those applied to public works projects. These loans totaled
about $40 million as of the end of 2005.8 Out of the first 26 firms to either begin operations or
contemplate beginning operations in the near term, 25 of them applied for loans from the Inter-
Korea Cooperation Fund.9 South Korea also provides political risk insurance that will cover
financial losses up to 90% of a company’s investment in the KIC up to 5 billion South Korean
won ($5.4 million). Under a South Korean law passed in April 2007, South Korean small and
medium-sized firms operating in the KIC are eligible for state subsidies and other benefits equal
to their counterparts at home.10
7 Under the Agreement Regarding Admission and Staying in the Kaesong Industrial Complex and Mt. Kumgang
Special Tourism Zong (a.k.a. the Passage Agreement), the principle of compulsory repatriation of offenders was
acknowledged by Pyongyang. This was important for South Korean businesses because under North Korean law, even
crumbling a newspaper that displays Kim Jong-il’s picture is considered a criminal act. (See Lim, Eul-chul. Kaesong
Industrial Complex, History, Pending Issues, and Outlook, Seoul: Haenam Publishing Company, 2006, pp. 42-43.)
8 Hyundai Asan. Kaesong Industrial Park, brochure. c. 2006. ROK. Ministry of Unification. Gaesong Industrial
Complex: Frequently Asked Questions (May 21, 2006).
9 Lim, Eul-chul. Kaesong Industrial Complex, op. cit., p. 172.
10 South Korean Assembly Passes Bill on Inter-Korean Industrial Complex. Yonhap News Agency, April 27, 2007.
Reported by BBC Monitoring Asia Pacific.
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Table 2 shows the first three phases of the master plan for the project. The first phase
encompasses 800 acres with as many as 300 South Korean firms operating in the complex. At the
end of phase 3, the plan calls for as much as 4,800 acres in the industrial zone with as many as
1,500 firms employing 350,000 North Korean workers and producing $16 billion worth of
products per year. It also includes 2,200 acres in a supporting zone with residential facilities
(dorms), commercial establishments (hotels, restaurants, offices, conference rooms), and tourist
facilities (golf course, peace park, theme park). The Master Plan also includes an Expansion Zone
of 1,600 acres for industrial use and 4,000 acres for support. This would be used after phase 3 and
would accommodate an additional 500 companies, 150,000 employees, and estimated production
of $4 billion per year. Counting the expansion zone, the grand totals for the Master Plan would be
6,400 acres for the Industrial Zone (10 square miles), 6,200 acres for the Supporting Zone, 2,000
companies, 500,000 workers, and $20 billion per year in products. The industrial and supporting
zones together cover an area roughly one-fifth the size of Washington, DC.
Table 2. Hyundai’s Original Concept of the First Three Phases
of the Master Plan for the Kaesong Industrial Complex
Phase 1
(includes pilot)
Phase 2
Phase 3
Year
2002-2007
2006-2009
2008-2012
Total Land at
800 acres in
2,000 acres in
4,800 acres in
Completion of Stage
Industrial Zone.
Industrial Zone
Industrial Zone
Kaesong City as a
800 acres in
1,600 acres in
Supporting Zone
Supporting Zone
Supporting Zone
Total ROK Firms
300 800
1,500
at Completion of Stage
Total DPRK Workers at
100,000 200,000 350,000
Completion of Stage
Source: ROK, Ministry of Unification.
The development of the KIC has been subject to some modifications and delays, such as the
moratorium on new factories that the South Korean side imposed for several months after North
Korea test-fired medium and long-range missiles in July 2006.11
As of mid-2006, 1,800 companies had applied for entry into the KIC and had requested 5,112
acres. Of these 1,800 companies, 365 were in mechanical manufactures (auto parts, bolts, etc.),
298 in garments, 261 in textiles, 198 in electronics, and 112 in chemical materials (rubber, plastic,
etc.). Other products to be manufactured include shoes, bags, toys, accessories, and other
products.12
The KIC aims to attract South Korean companies, particularly small and medium sized
enterprises, seeking lower labor and other costs for their manufactured products as an alternative
to establishing subsidiaries in China or other low-wage markets. As indicated in Table 1, by the
end of 2009, about 120 companies had begun operations in Kaesong and were employing over
40,000 North Korean workers.
11 Ministry of Unification. Current Status of Operation in the Gaeseong Industrial Complex. November 23, 2007.
12 Hyundai Asan. Kaesong Industrial Park, brochure. c. 2006.
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Of the $374 million initial cost for the first stage, $223 million was to be provided by the South
Korean government. Much of the supporting infrastructure has been built, including a job training
center, a water supply plant (which sends about one-quarter of its 60,000 tons/day capacity to
Kaesong City), a wastewater treatment plant, and an electricity substation. In December 2006, the
Korea Electric Power Corporation connected North Korea and South Korea by a 100,000 kilowatt
power-transmission line and in June 2007 began transmission of high-voltage electricity for use
by the companies in the KIC. In December 2007, the two Koreas announced what was to be daily
train service across the demilitarized zone along a recently reconnected rail line between the two
Koreas. Regular train service, however, has not begun. The plan is for the trains to connect the
KIC to South Korea in the south and to China in the north. Currently, the trains terminate south of
Kaesong, in Bongdong, which does not have loading facilities.13 Meanwhile, Kaesong is
connected to South Korea by a road that has thousands of vehicles per day passing through the
checkpoints.
The 15 companies operating in the Pilot Industrial Complex in Kaesong in 2006 and their
products include Sonoko Cuisine Ware (kitchenware), SJ Tech (semiconductor component
containers), Shinwon (apparel), Samduk Trading (footwear), Bucheon Industrial (wire harness),
Taesung Industrial (cosmetics containers), Daewha Fuel Pump (automobile parts), Munchang Co.
(apparel), Romanson (watches, jewelry), Hosan Ace (fan coils), Magic Micro (lamp assemblies
for LCD monitors), JY Solutec (automobile components and molds), TS Precision Machinery
(semiconductor mold components), Yongin Electronics (transformers, coils), and JCCOM
(communication components).14
As shown in Table 3, in 2009, the KIC-produced goods totaled $256.5 million, up from $251.4
million worth in 2008. This represented a 2% year-on-year increase, despite a 10% increase in the
number of North Korean workers at the complex. As of the end of December 2009, nearly 52% of
the cumulative production total had been in textiles and clothing, 20% in metals and machinery,
18% in electronic products, and 10% in chemical products. The share of textile and clothing
production has increased over time, from 46% in 2007 to 59% in 2009.15
Currently, all products made in the KIC are shipped to South Korea for sale there or for export
after clearing customs in the ROK. The primary export destinations are China and Russia. Other
than labor, land, and site construction materials, there now is no local procurement of inputs into
the manufacturing processes in the KIC nor are products manufactured in the KIC sold in North
Korean markets. Most companies there use labor-intensive manufacturing processes with raw
materials and intermediate goods from South Korea shipped to Kaesong for final assembly. As
the KIC is expanded, however, companies could procure some of their manufacturing inputs
locally.16
13 Economist Intelligence Unit. South Korea Country Report. January 2008.
14 Republic of Korea. Ministry of Unification. Gaeseong Industrial Complex Project—Status and Tasks, June 2005.
15 Figures derived from statistics provided by ROK Ministry of Unification. See Table 3.
16 ROK. Ministry of Unification. Gaesong Industrial Complex: Frequently Asked Questions (May 21, 2006).
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Table 3. Production by Category in the Kaesong Industrial Complex
(US $1,000)
Textiles
Electric and
and
Chemical
Metals and
Electronic
Clothing
Products
Machinery
Products
Other
Total
2005 6,780 1,768
5,250
1,108
-
14,906
2006 27,793 10,900
20,853
14,191
- 73,737
2007 85,543 18,262
41,947
39,027
-
184,779
2008 132,179 21,785
49,250
47,162
1,046 251,422
2009 152,050 26,179
37,312
37,584
3,350 256,475
Source: ROK, Ministry of Unification June 2010 e-mail to CRS.
It is not yet clear whether South Korean companies operating in the KIC are doing so primarily
for political purposes or whether their operations in the complex are economically viable. Also, it
is not clear whether companies in the complex would be economically viable without South
Korean government support in providing infrastructure and loans with below-market interest
rates. The KIC does provide small and medium-sized businesses access to labor costs lower than
those in China or Vietnam, a workforce that speaks the same language, and proximity to large
markets in South Korea. Some companies appear to be using production in Kaesong to replace
that in China, South Korea, or elsewhere, but others may be using government-subsidized loans
and political risk insurance to invest in politically popular projects. The long list of companies
that have applied to enter the KIC, however, indicates that investments there likely are seen as
profitable for most businesses. It also should be noted that an estimated 40% of the small and
medium-sized South Korean companies that established operations in China have not been
successful there. Many have withdrawn from that market. The KIC is viewed as essential for
survival by some of these companies.17
The experience of some of the early investors in Kaesong may be indicative of the economic
viability of the project. ShinWon (clothing) established operations in the KIC to take advantage of
the dexterity and lower cost of North Korean workers, favorable logistics, and to avoid nontariff
barriers in China and Southeast Asia. By manufacturing about 16% of five of its clothing lines
there, it expects to accrue considerable savings in production costs. It considers its Kaesong
factory to be optimal when compared with those it has in China, Indonesia, Vietnam, and
Guatemala.18
Samduk Trading Company produces high-quality shoes in the KIC. Start-up costs were high
because of the need to train workers. It took eight months for some production lines to reach 60%
of the productivity level of South Korean companies. The Romanson company (watches) finds
the KIC superior to production in China because of the common language and low labor costs. It
reportedly plans to move 75% of its watch production to the KIC. The Moonchang company
(uniforms, seat covers, leisure clothes) faced a rough start in dealing with its North Korean
workers but feels it is now on the right track. The Woori Bank is in a difficult situation because of
the limited customer base and low demand for personal or business loans. Its main business is
17 Lim, Eul-chul. Kaesong Industrial Complex, History, Pending Issues, and Outlook, Seoul: Haenam Publishing
Company, 2006, pp. 68-69.
18 Ibid., pp. 101-103.
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currency exchange. It provides zero interest rates on deposits because there are no means to make
profits by investing deposits elsewhere in North Korea.19
Issues Related to the Kaesong Industrial Complex
The KIC has raised several issues with U.S. policy makers. These include labor conditions,
financial benefits for Pyongyang, the KIC in the KORUS FTA, and the control of U.S. exports to
Kaesong.
Labor Issues
A question with respect to the KIC has been the conditions for North Korean workers there and
whether they are being exploited.20 In January 2007, Jay Lefkowitz, President Bush’s special
envoy for human rights in North Korea, wrote that one of the concerns he had with the Kaesong
Industrial Complex is that authorities take a portion (as much as 45%) of the wages paid by the
South Korean companies. He noted that verified details are elusive, and neither the DPRK nor
South Korean government, nor any company, has been able to state definitively how much of his
or her wage a Kaesong worker is allowed to keep.21
According to South Korean officials, average wages and working conditions at Kaesong are far
better than those in the rest of North Korea.22 The monthly minimum wage is $72.20 ($81.30
including the cost of social insurance), or between $2 and $3 per day. Increases in the minimum
wage are capped at 5% per year. The minimum wage has risen from $50 per month when the park
opened in 2004. General workers receive the base rate, while team leaders and heads of
companies receive more. Workers also receive overtime pay of about $5 per month.23 For
extended working hours, the overtime premium is 50% of the hourly wage rate. For public
holidays and nighttime work (10 p.m. to 6 a.m.), the overtime premium is 100% of the hourly
wage rate. In some cases, North Korean workers have asked for additional night shift or weekend
work in order to qualify for additional pay.24 Companies also may pay cash rewards as a special
incentive. KIC employees receive 14 days per year in vacation time. At first, North Korean
workers were reluctant to ask for leave time, but now they do.25 Female employees receive 60
days paid maternity leave.26 As of 2006, labor costs in Kaesong are approximately 8% of those in
a South Korean metropolitan area.27 South Korean labor laws extend to South Korean workers in
the KIC.28
19 Ibid., pp. 108-126.
20 Rights Body Criticizes South Korea Over Refugee Protection, Inter-Korean Complex. Yonhap News Agency, Seoul.
Reported by BBC Monitoring Asia Pacific. London, January 12, 2007.
21 Lefkowitz, Jay P. For a Few Dollars More, Wall Street Journal, January 10, 2007. p. A16.
22 The DPRK has ratified no International Labor Organization conventions.
23 Kaesong Industrial District Management Committee (KIDMAC), “Kaesong Industrial Complex,” December 2009.
24 Kaesong Industrial Complex Management Council. Survey of North Korean Workers from Fifteen Different
Companies. February 2007. (Partial translation by the ROK Embassy in Washington, DC.)
25 Ibid.
26 ROK. Ministry of Unification. Gaesong Industrial Complex: Frequently Asked Questions (May 21, 2006).
27 Hyundai Asan. Kaesong Industrial Park, brochure. c. 2006.
28 South Korean Assembly Passes Bill on Inter-Korean Industrial Complex. Yonhap News Agency, April 27, 2007.
(continued...)
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In April 2007, Unification Ministry officials confirmed that the DPRK had requested pay raises of
30% and 10% for members of the North Korean workforce who are graduates of four- and two-
year colleges, respectively. The two categories make up about 11% each of North Korea’s
workforce in the KIC.29
The wages of North Korean workers are paid in dollars (or other hard currency other than South
Korean won) first to the Central Special Direct General Bureau, a North Korean government
agency. Article 34 of the Labor Law of the Kaesong Industrial Complex, however, states that
wages must be paid directly to employees in cash. The DPRK claims that this is not being
implemented now because of the lack of foreign exchange centers in the KIC.30 In 2007, the ROK
Ministry of Unification stated that of the $57.50 minimum monthly salary at the time, $7.50 or
15% of the base pay went for social insurance (providing for unemployment and occupational
hazards). The government also deducts $15 or 30% for a socio-cultural policy fee that goes for
rental of state-owned housing, education, medical services, social insurance, and social welfare
and reportedly is given to the Kaesong City People’s Committee. According to the Ministry, the
remaining $35 was paid to the workers in cash (upwards of 5% in North Korean won) or as chits
that could be exchanged for daily supplies (food and necessities).31 At the exchange rate of 140
North Korean won per dollar at the time, the $35 translated into 4,900 won. (A kilogram of rice
costs about 44 won if bought from North Korea’s public distribution system but as much as 1,000
won if bought on the open market. The average family consumes about 60 kilograms of rice per
month.)32 Companies provide the workers with a way to verify their wages by having them sign a
ledger or provide a pay slip when they receive their pay.
The ROK Ministry of Unification announced in November 2006 that it was working with an
Australian-South Korean company (Lobana Trading Company) to provide basic necessities to
Kaesong. These items are sold primarily at the Kaesong Department Store.33 Since the
government distribution system covers only part of a family’s needs for items such as rice and
sugar, the rest of the basic necessities are obtained by barter or purchased at the department store,
even though prices are higher there.
North Korean workers commute to the KIC by bus provided by the Kaesong Industrial Complex
Management Council and by some 1,000 bicycles also provided for workers living closer to the
complex. According to the KIC Management Council, the health condition of workers at the KIC
has visibly improved as they have had access to better nutrition.34
(...continued)
Reported by BBC Monitoring Asia Pacific.
29 South Korea Considers Expanding Joint Industrial Complex in North. Yonhap News Agency, Seoul. Reported by
BBC Monitoring Asia Pacific. London, July 26, 2006. Ministry of Unification (South Korea). The Gaesong Industrial
Complex. Status of North Korean Workers. November 14, 2006. North Korea Economy: Kaesong Zone Expansion to
Resume. Economist Intelligence Unit ViewsWire. New York: May 8, 2007.
30 ROK. Ministry of Unification. Gaesong Industrial Complex: Frequently Asked Questions (May 21, 2006).
31 Ko, Gyoung-Bin. All the Salary Goes to the North Korean Workers at the Gaeseong Industrial Complex (GIC),
January 31, 2007. Ministry of Unification document #uni4101.
32 North Korea Today, No. 38, September 2006. Good Friends: Centre for Peace, Human rights and Refugees.
September 27, 2006.
33 Lim, Eul-chul. Kaesong Industrial Complex, History, Pending Issues, and Outlook, Seoul: Haenam Publishing
Company, 2006, p. 148.
34 Kaesong Industrial Complex Management Council. Survey of North Korean Workers from Fifteen Different
Companies. February 2007. (Partial translation by the ROK Embassy in Washington, DC.)
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The actual recruitment of workers is done by North Korea’s Central Guidance Agency on Special
Zone Development, a cabinet level administrative body. The South Korean hiring company,
however, may reject any recruit provided or if the recruit does not demonstrate the requisite skills
(e.g., sewing), hire the worker as a trainee at 70% or less of the minimum wage. Employers
cannot freely punish or fire incompetent workers. They must give instructions through North
Korean mid-level managers. Directly scolding employees is regarded as humiliation and
prohibited.35 The experience of many companies, however, is that labor management is a
challenge during the start-up phase of a factory in the KIC. Gradually, however, North Korean
workers begin to identify with the company, and a level of trust is developed between the South
Korean executives and the North Korean managers and workers.36
Currently, North Korean workers do not have the right to change employers. This promises to
keep labor costs from escalating as they have in other developing markets as foreign firms bid for
skilled workers. This also provides companies in the KIC with a stable (though aging)
workforce.37 This practice, however, conflicts with what would be consistent with internationally
accepted workers’ rights.
Figure 2. Leased Space Factory Building
to be Constructed in the Kaesong Industrial Complex
Source: ROK, Ministry of Unification.
Financial Benefits for Pyongyang
A key aspect of the KIC for U.S. interests is how much the North Korean government derives in
hard currency from the project, including leasing fees and its share of the wages of North Korean
35 Lim, Eul-chul. Kaesong Industrial Complex, op. cit., p. 144.
36 Ibid., p. 98ff.
37 Ibid., p. 103.
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workers. The wages are first paid in hard currency (dollars) to a North Korean government
agency that deducts for certain items before paying the North Korean workers in won or in chits
to be exchanged for food and necessities. South Korean and U.S. government officials estimate
that the North Korean government collects $3 million to $4 million per month, primarily from
social insurance taxes and a socio-cultural fee deducted from the wages received by North Korean
workers (the socio-cultural fee reportedly goes to the Kaesong city, not the central government).
In addition, there are land lease fees and other payments to the North Korean government. When
the project was initiated, Hyundai Asan paid North Korea $12 million for a 50-year lease on the
entire Kaesong site. Hyundai Asan and the Korea Land Co. also purchase sand and gravel and
other raw materials from North Korea for use in site development at Kaesong.38 Companies in the
KIC also pay North Korea’s job reference agency (recruiting agency) a commission of $17 per
employee sent.39
Under an agreement on taxation, businesses in the KIC are subject to a 10% to 14% corporate
income tax, but the tax has an exemption for five years after first generating profits and a 50%
deduction for the ensuing three years. This compares favorably to corporate tax rates in South
Korea (12% to 28%), China (15%), and in Vietnam (10% to 15%).40 In 2007, the companies in
Kaesong had not been operating long enough there to have to pay corporate income taxes to the
DPRK.
In 2004, the Hyundai Research Institute estimated that North Korea could receive $9.55 billion in
economic gains over the course of nine years if the KIC were to be developed fully and operated
successfully. This would include $4.6 billion in foreign currency earnings with $700 million
derived directly from the operation of the KIC, $2.5 billion from sales of raw materials and other
industrial products, and $1.4 billion from corporate taxes.41 Considering that in international trade
in goods in 2005, North Korea exported $1.8 billion and imported $3.6 billion, the estimated total
gains of $9.55 billion over nine years associated with the Kaesong Industrial Complex would be
quite significant (provided it progresses according to plan).
Kaesong and the Proposed Korea-U.S. Free Trade Agreement
During the negotiations on the KORUS FTA, South Korea requested that products exported from
the complex be considered to have originated in South Korea in order to qualify for duty-free
status under the proposed FTA. Under the South Korea-ASEAN FTA, for example, preferential
tariffs are applied to 100 items manufactured in the Kaesong Industrial Complex.42 The Korea-
Singapore and Korea-European Free Trade Association (EFTA) FTA agreements also include
products from the KIC.43 Singapore accepts 88.6% of the traded products from the KIC as long as
no products are directly exported from the DPRK. The Korean FTA with EFTA limits coverage to
38 Communication from the Office of Korean Affairs, U.S. Department of State to the Congressional Research Service,
June 7, 2007.
39 Lim, Eul-chul. Kaesong Industrial Complex, History, Pending Issues, and Outlook, Seoul: Haenam Publishing
Company, 2006, p. 144.
40 Ibid., pp. 73-74.
41 Ibid., p. 61.
42 Merchandise FTA with Five ASEAN Countries to Take Effect Next Month. Yonhap News (Seoul), May 30, 2007.
43 Channel News Asia, Singapore. South Korea, Singapore Initial Free Trade Accord, April 17, 2005. EFTA includes
Iceland, Liechtenstein, Norway, and Switzerland. ROK, Ministry of Foreign Affairs and Trade. Korea-European Free
Trade Association (EFTA) FTA, June 16, 2007.
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2.9% of the total trade and only for those exports that have first been brought into the South
Korean territory and which have 60% of the total materials cost as South Korean.44 In the
negotiations between South Korea and the European Union, Seoul requested products from
Kaesong be covered by the proposed FTA. The final 2009 EU-South Korea FTA, however,
contains a provision similar to that included in the KORUS FTA.45 In 2006, the European Union
(15 nations) imported $185.7 million worth of goods from North Korea. Switzerland imported
$0.8 million and Singapore $6.6 million.
For the United States, however, from the beginning of the FTA negotiations, the U.S. position was
that only products originating in South Korea would be included.46 At a U.S. House International
Relations Committee hearing on July 20, 2006, Assistant U.S. Trade Representative Karan Bhatia
indicated that the proposed FTA would not cover goods made in a free-trade zone in North
Korea.47
The text of the Korea-U.S. Free Trade Agreement (signed by representatives of each government
but not yet approved by Congress) does not provide for duty-free entry into the United States for
products made in the Kaesong Industrial Complex. Annex 22-B to the proposed FTA, however,
provides for a Committee on Outward Processing Zones (OPZ) on the Korean Peninsula to be
formed and to “identify geographic areas that may be designated outward processing zones,”
determine whether any such zone “has met the criteria established by the Committee,” and
recommend them to the respective governments, which “shall be responsible for seeking
legislative approval for any amendments to the Agreement with respect to outward processing
zones.” The Committee also is to “establish a maximum threshold for the value of the total input
of the originating final good that may be added within the geographical area of the outward
processing zone.” Decisions of the Committee would require unified consent (this arguably
provides the U.S. side with veto power over any recommendation of the committee). The criteria
to be met include but are not limited to “progress toward denuclearization of the Korean
Peninsula; the impact of the outward processing zones on intra-Korean relations; and the
environmental standards, labor standards and practices, wage practices and business and
management practices prevailing in the outward processing zone, with due reference to the
situation prevailing elsewhere in the local economy and the relevant international norms.” The
OPZ committee is to meet at least annually beginning a year after the agreement goes into effect.
A question has arisen with respect to language in Annex 22-B pertaining to labor standards and
practices in the KIC with due reference to the “situation prevailing elsewhere in the local
economy and the relevant international norms.” Is the local economy in this case that of the
DPRK or that of South Korea, and can products from the KIC be produced under conditions
contrary to International Labor Organization agreements that lay out basic international standards
44 Lim, Eul-chul. Kaesong Industrial Complex, History, Pending Issues, and Outlook, Seoul: Haenam Publishing
Company, 2006, p. 189.
45 Article 15.2.1 of the EU-Korea Free Trade Agreement creates a Committee on Outward Processing Zones on the
Korean Peninsula, which is described in Annex IV of the Protocol Concerning the Definition of ‘Originating Products’
and Methods of Administrative Co-Operation, http://trade.ec.europa.eu/doclib/docs/2009/october/tradoc_145192.pdf.
46 For details, see CRS Report RL34330, The Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA):
Provisions and Implications, coordinated by William H. Cooper.
47 Hyde Warns USTR to Keep Kaesong, Visas out of Korea FTA. Inside US Trade, July 21, 2006.
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or worker rights yet still be recommended by the OPZ Committee to be included under the
FTA?48
Another issue raised by the KORUS FTA is whether intermediate products made in the KIC can
enter the United States under the provisions of the FTA if they are incorporated into products that
are manufactured in South Korea and that qualify as originating in South Korea. The same
concern exists with respect to products made in China or elsewhere if they have North Korean
inputs. Currently, goods of North Korean origin may not be imported into the United States either
directly or through third countries, without prior notification to and approval of the Office of
Foreign Assets Control of the Department of the Treasury.49
A further issue with respect to the KIC and the KORUS FTA is that if KIC products made with
the low-cost North Korean labor are allowed to be treated as South Korean in origin under the
proposed KORUS FTA, South Korean exporters would enjoy a large cost advantage over their
counterparts in the United States.
The Control of Exports to Kaesong
The United States maintains a comprehensive economic embargo against the DPRK because of
its designation as a state sponsor of international terrorism. The Departments of Commerce and
the Treasury jointly administer the trade embargo under the Trading With the Enemy Act of 1917
and the Export Administration Act. The Department of Commerce licenses U.S. exports and re-
exports, while Treasury grants general and/or specific licenses for financial transactions by U.S.
persons with DPRK entities. The Department of Commerce requires a license for the export to
North Korea of virtually all commodities, technology, and software, except for technology
generally available to the public and gift parcels (not exceeding $400).50 For instance, in FY2006,
the U.S. Bureau of Industry and Security approved two items for export to the DPRK. They were
glass (fiber optic) transmission items (5A991) worth $213,919 and software (5D992) for
$3,600.51 The transmission items were telecommunications equipment used by Korea Telecom in
setting up the communications lines between the two Koreas and into the KIC.52
The South Korean government also maintains strict controls over exports to the DPRK. The
restricted items include machinery and inspection equipment to produce metal and machines,
electronics, optics, laser-related equipment, microorganism cultivating devices and chemical
product facilities, and sophisticated high-technology equipment and materials. Even the latest
versions of personal computers, commonly available in the South, are restricted and, if their
48 See Letter, Rep. Sander Levin, Chair of the House Ways and Means Subcommittee on Trade to Ambassador Susan
Schwab, USTR. June 12, 2007.
49 U.S. Treasury, Office of Foreign Assets Control. North Korea: What You Need to Know About Sanctions. c. 2007.
See Title 31, Part 500, U.S. Code of Federal Regulations.
50 U.S. Bureau of Industry and Security. Embargoed Countries and Entities (Section 746), Export Control Program
Description and Licensing Policy. For information on U.S. export controls, see CRS Report RL31832, The Export
Administration Act: Evolution, Provisions, and Debate, by Ian F. Fergusson.
51 Bureau of Industry and Security, U.S. Department of Commerce, Bureau of Industry and Security Annual Report,
Fiscal Year 2006. c. 2007, p. 93.
52 The export license was approved by the U.S. Export Administration on November 16, 2005. (See Lim, Eul-chul.
Kaesong Industrial Complex, History, Pending Issues, and Outlook, Seoul: Haenam Publishing Company, 2006, p.
206.)
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export is approved, they have to be kept under lock and key in the KIC.53 New high-technology
monitoring systems, including tracking devices, are also being used for items with sensitive dual-
use technology.
In the October 2007 summit between South Korean President Roh Moo-hyun and North Korean
leader Kim Jong-il, the North agreed to improvements in how Kaesong operates, including
swifter customs clearance for goods crossing its border, and better computer and cell-phone
communications connections between Seoul and Kaesong factories. The transition team of
incoming President Lee Myung-bak has indicated that it likely will continue with these plans.54
Long-Term Geopolitical and Economic Issues
The Kaesong Industrial Complex sits at the hub of spreading concentric sets of economic and
geopolitical interests and concerns. At its narrowest sense, the KIC is a business venture in which
participants are seeking profits and business advantages. On the South Korean side, the KIC
provides small and medium-sized companies with a manufacturing platform and opportunity to
access low-cost labor without having to go overseas to establish subsidiaries or to outsource the
assembly of their products to China or other markets. On the DPRK side, the KIC provides jobs
for workers who can earn relatively higher wages without crossing their borders illegally or
working under contract in labor-scarce countries such as those in the Russian Far East or in
Middle Eastern countries.
At a somewhat wider set of interests, the KIC provides a channel for rapprochement between the
DPRK and South Korea. Kaesong developed partly from South Korea’s sunshine policy of
economic engagement with the North. It can be viewed as a confidence-building measure
between two countries whose hostility toward each other has lingered since the 1950-52 Korean
War. As has been the case with the extensive economic interchange between China and Taiwan,55
the KIC may provide a bridge for communication and a catalyst for cultural interaction, and it can
create stakeholders in each other’s economies with a shared interest in stability, liberalization, and
increased communication across the DMZ.
At a still wider set of interests, the KIC may be the proverbial camel’s nose under the tent in
attempts to reform, liberalize, and modernize the North Korean economy. In neighboring China in
1978, foreign businesses were first allowed to operate in special economic zones. Now foreign
invested businesses generate more than half of China’s exports and imports. The Chinese speak of
practicing socialism with Chinese characteristics and, indeed, many state-owned enterprises still
encumber the Chinese economic system. The state-owned enterprises that are successful,
however, operate much like privately owned enterprises, and one is hard pressed to find other
significant differences between the Chinese brand of socialism and market capitalism. In May
2010, Kim Jong-il paid his fifth visit to China to visit special economic zones and to discuss
53 Ibid., p. 204.
54 Ahn Yong-hyun, “Lee Gov’t to Postpone Some Inter-Korean Mega Projects,” Chosun Ilbo, January 8, 2007.
55 For a discussion of this issue, see CRS Report RL32882, The Rise of China and Its Effect on Taiwan, Japan, and
South Korea: U.S. Policy Choices, by Dick K. Nanto and Emma Chanlett-Avery.
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issues. He also visited an industrial site.56 Likewise, the KIC exposes average North Koreans to
modern business methods and to the accouterments of Western industrial society.
According to the Economist Intelligence Unit, the decrepit North Korean economy has “three
crying needs: deeper market reforms, greater openness, and above all, massive investment to
modernize decrepit plant and infrastructure.”57 The KIC potentially addresses all three of these
needs to a limited extent. However, reports from North Korea indicate that the economic reforms
there currently are stalled—even being reversed. Unlike China’s reforms, moreover, the initiative
for the KIC came from abroad, is viewed with suspicion by many, and is an isolated case.
Pyongyang, however, has renamed the Rajin-Sonbong region bordering China as Rason and is
attempting to attract more Chinese investment there.58 In sum, it is still too early to tell if Kaesong
will succeed, much less have a large effect on the rest of the North Korean economy.
At a geopolitical level, Kaesong is one part of the standoff between the DPRK and the United
States, China, South Korea, Japan, and Russia, over North Korea’s nuclear weapons program.
Under the rubric of the six-party talks lie a bundle of strategic issues, such as the ability of North
Korea to finance its nuclear program, the need for humanitarian and energy aid, the stability of
the Kim Jong-il regime, and the enforcement of various economic sanctions being applied to
North Korea. A major goal of the United States in the six-party talks is to halt and verifiably
dismantle North Korea’s capability to produce nuclear fuel and nuclear bombs or to proliferate
nuclear material or technology to potentially hostile countries or groups. The U.S. strategy to
accomplish this is a combination of sticks (sanctions, diplomatic isolation, name calling) and
carrots (promises of aid, diplomatic recognition, security guarantees) conveyed to North Korea
through the six-party talks, bilateral meetings, and occasional media blasts. Under this strategy,
there is little reason to provide the DPRK with any financial reward, even if it is to the benefit of
South Korea, unless it shows significant progress in its commitments under the six-party talks.
The South Korean goals with respect to North Korea, however, not only include the
denuclearization of the Korean peninsula but eventual reunification and reconstruction of the
DPRK’s economy. A major South Korean concern is the potential cost of reunification either in
the form of a flood of economic emigrants to the South or in actual budgetary outlays to help
rebuild the North’s civilian economy. The high cost to West Germany of the integration of East
Germany after the fall of the Berlin Wall has provided little comfort to the policy makers in
Seoul. The South Korean strategy, therefore, has tended to be longer on carrots (promises of food,
fuel, and fertilizer) and shorter on sticks (sanctions) with a heavy reliance on engagement across
the interactive spectrum and on diplomacy to resolve the issue. Even after the North Korean
nuclear test in 2006, South Korea continued the KIC operations. It only halted its plans to call for
new applicants to enter the KIC. Existing production facilities continued to manufacture, and
existing applications moved forward. Although ROK President Lee Myung-bak has said he will
seek more reciprocity in Seoul’s dealings with Pyongyang, and he has been somewhat vague
about how he will treat the KIC, his statements to date have been widely interpreted to mean that
phase 1 of the complex, at a minimum, will continue operating. Undoubtedly, the KIC would be a
centerpiece if Lee enacts his “Grand Bargain,” under which South Korea would provide massive
development assistance if North Korea dismantles its nuclear program.
56 See, for example, Wu Jiao, “Development is key during Kim’s visit,” China Daily (Internet edition), May 5, 2010.
57 The Economist Intelligence Unit. Country Report, North Korea, May 2007. p. 13.
58 Scott Snyder, Rajin-Sonbong: A Strategic Choice for China in Its Relations with Pyongyang, China Brief Volume:
10 Issue: 7, The Jamestown Foundation, April 1, 2010.
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For South Korea, not only does Kaesong provide entry into the decrepit DPRK economy, but it is
a key factor in building up and reforming the economy in the North with an eye toward eventual
reunification. Beijing’s strategy before the return of Hong Kong in 1997 has been instructive to
Seoul. A major reason that many of the first economic reforms in China occurred in nearby
Guangdong Province, particularly just across the border from Hong Kong in Shenzhen city, was
that Beijing tried to stem pressures to immigrate to Hong Kong by raising the standard of living
and industrial development in the region abutting the returning territory. This strategy has been so
successful that some immigration, particularly of Hong Kong retirees, has been going from Hong
Kong to Guangdong Province and not the other way around. Likewise, Beijing has broadened ties
with Taiwan through allowing cross-strait investments, travel, business visas, communication,
and other business-based activities. In some sectors, particularly in the manufacture of computers
and other electronic products, Taiwan and the east coast of China have become one integrated
economy. Kaesong arguably could begin a similar process with North Korea.
South Korea also aims to become a hub of East Asia. In order to accomplish this, it would like to
be connected to China, Russia, and to Europe via railways that pass through North Korea. As part
of the KIC project, North and South Korea have reconnected a railroad line connecting the north
and south and have conducted a test run on it. (A second line on the opposite side of the peninsula
also was connected.) In terms of logistics, a shipment by rail from South Korea via Kaesong to
Hamburg, Germany would take about 27 days by ship, 10 days via the Trans-Siberian Railway,
and 7 days via the Trans-China Railway.59 (See Figure 3.)
Figure 3. Kaesong’s Potential Logistical Role
Source: Hyundai Asan
59 Hyundai Asan. Kaesong Industrial Park, brochure. c. 2006.
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U.S. Interests and Policy Options
The three national interests of the United States that form the basis of all policy discussion are
security, economic well-being, and value projection. These three national interests all play into
consideration of the Kaesong Industrial Complex.
The main security concern for the United States is the location of the KIC in the DPRK. U.S.
security concerns with respect to North Korea center on two major considerations: (1) the
DPRK’s nuclear program and (2) potential conflict across the DMZ separating North Korea and
South Korea. The KIC has opposing effects upon these security considerations. On one hand,
since income in any country is fungible, anything that increases revenue to the Pyongyang regime
has the potential to contribute to the DPRK’s military (including its missile and nuclear program).
It is likely, however, that the DPRK’s nuclear program has assured funding from the government.
Also, given Kim Jong-il’s “military first” policy, the North Korean military has top priority in the
allocation of scarce economic resources. It also has call on certain economic activities and
government subsidies for them. It is not clear how much, if any, income (over that used to pay for
expenses related to Kaesong) for Pyongyang from the KIC currently is directed toward the DPRK
military or nuclear program. Since the KIC land formerly was a military base that had to be
vacated,60 some arrangement may have been made to compensate the military for relinquishing a
strategically important piece of ground. Even if the income from the KIC does not go directly into
military purposes, it may bolster funds for civilian purposes that had been cut because of the
budgetary demands of the military. The Kim regime, moreover, uses scarce foreign exchange to
bolster the loyalty of its inner circle of elites who use it to buy imported luxury goods.
U.N. Security Council resolutions 1718 (adopted October 2006) and 1874 (adopted June 2009)
explicitly prohibit any member state from providing funds that go to support North Korea’s
nuclear weapons program. Resolution 1718 states in Section 8(d) that all Member States shall, in
accordance with their respective legal processes, ensure that any funds, financial assets or
economic resources are prevented from being made available by their nationals or by any persons
or entities within their territories, to or for the benefit of persons or entities engaged in or
providing support for the DPRK’s programs related to nuclear weapons, other weapons of mass
destruction, and ballistic missile related programs.
As for tensions across the DMZ, the KIC already has played an important role in increasing the
level of engagement between the DPRK and South Korea and in raising the priority of economic
activity relative to security concerns. Even though the border between North Korea and South
Korea is heavily guarded and crossings had been rare, the military on both sides have acquiesced
to the daily traffic on the North-South highway to Kaesong and the re-connection of two railways
across the DMZ (along with limited tourist visits and family reunions).
In terms of the second U.S. national interest of economic well-being, the KIC currently has little
relevance, although it has some effect through U.S. trade and investment relations with South
Korea. U.S. companies have no investments in Kaesong and U.S. trade with North Korea in 2009
was virtually non-existent. South Korea, however, is the seventh largest trading partner of the
United States, and the United States is South Korea’s third largest trading partner. If the six-party
60 Lim, Eul-chul. Kaesong Industrial Complex, History, Pending Issues, and Outlook, Seoul: Haenam Publishing
Company, 2006. p. 37.
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talks on the denuclearization of the Korean Peninsula were to re-start and progress far enough, the
United States could re-establish diplomatic relations with the DPRK, lift economic sanctions, and
eventually grant that country normal trade relations (most-favored nation) status. If so, trade with
North Korea could be done on the same basis as trade with most other countries of the world.
Absent that development, South Korea’s request to treat products made in the KIC as South
Korean in origin would seem to be the only way to bring the KIC into the set of industrial
locations open to normal or preferential trade with the United States. Meanwhile, South Korean
companies exporting KIC products likely will continue to avoid the U.S. market rather than face
economic sanctions and high U.S. tariffs. This may give countries that include the KIC in their
FTAs with South Korea (such as ASEAN and EFTA) a possible small diplomatic advantage over
the United States in dealing with Seoul. Moreover, South Korea is likely to press the United
States to change its KIC policy. This could be a source of future U.S.-ROK tension even if the
KORUS FTA is passed.
The third U.S. national interest is projecting U.S. values such as a market-based economy,
representative government, and nations adhering to world standards for working conditions,
environmental regulation, and other humanitarian considerations. In this respect, the KIC
potentially could play a significant role as a demonstration project to educate North Koreans on
the workings of a market-based economy. The KIC provides an opportunity for businesses to
operate in North Korea according to what may be higher labor and environmental standards than
exist in the rest of the country and to educate North Korean middle managers on how such
standards work.
Currently, the 40,000 North Koreans employed in the KIC are too few and the project too small to
have a significant impact on the development of the North Korean middle class (a factor in the
development of a more representative society), and the number of the elites in the DPRK with an
economic interest in the complex probably is still relatively small. If the project continues to
develop and the DPRK opens other free-trade zones, however, something akin to the economic
reforms in China or the economic transformation that is now occurring in Vietnam61 could occur
in North Korea. This could weaken the hold by Pyongyang on the daily lives of citizens and bring
the country more into the globalized world. Such economic liberalization also could reduce
pressures on North Korea to engage in illicit trade in order to cover its trade deficit62 and diminish
the need for Pyongyang to saber rattle in order to divert attention from its domestic problems.
In the short run, however, increased revenues strengthen the regime’s hand and make it less
vulnerable to outside pressure. Also, spillover effects will depend on North Korea adding much
more value to the production processes which it has yet to do. Finally, there is some question
about the extent to which KIC is commercially viable, or whether incentives and supports given
to South Korean firms are critical as opposed to marginal in their profit and loss calculations.
Trade between the DPRK and South Korea tends to be government-based, in contrast to trade
between China and North Korea. This may blunt the lessons learned by Pyongyang.
The United States currently has a mixed policy with respect to the KIC. Since South Korea is a
close ally of the United States, Washington has been supportive of efforts by South Korea to
61 See, for example, Bradsher, Keith, Vietnam’s Roaring Economy Is Set for World Stage, The New York Times,
October 25, 2006.
62 See, for example, CRS Report RL33885, North Korean Crime-for-Profit Activities, by Liana Sun Wyler and Dick K.
Nanto.
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The Kaesong North-South Korean Industrial Complex
engage the North in inter-Korean projects that benefit South Korea. On the other hand, the United
States has been firm in predicating any economic or other concessions on actions by the DPRK to
curtail or eliminate its nuclear program.
Major policy considerations and options for Congress, given the above U.S. interests, include the
following:
• In considering whether or not to approve the KORUS FTA, Congress may
express its support or non-support of the exclusion of the KIC from the FTA as
negotiated. Congress may also specify the conditions under which the KIC can or
can not be brought under the provisions of the proposed FTA. Congressional
disapproval of the proposed KORUS FTA likely would have a large negative
impact on prospects for the future of the KIC with respect to the United States.
• In the debate over the KORUS FTA, Congress may focus attention on labor and
other conditions in the KIC and encourage reforms.
• If the KORUS FTA is approved, Congress may provide close oversight of the
Committee on Outward Processing Zones.
• Since the United States already imposes a range of economic and financial
sanctions on the DPRK, the United States could either tighten or loosen them.
This could affect non-South Korean businesses in determining whether to invest
in the KIC or to purchase products made there. The United States also could
tighten (or loosen) U.S. controls on the export of dual-use technology items to
the KIC.
• The United States could impose restrictions on or provide inducements to U.S.
business activity in KIC.
• The U.S. government could encourage other countries (or groups of countries,
such as the European Union) to (or not to) include the KIC in their respective
FTAs with South Korea.
• If the DPRK takes the necessary steps to halt its nuclear program as outlined in
the six-party talks, support (or oppose) measures leading toward normal trading
relations status for the DPRK and the lifting of economic sanctions.
• The U.S. government could place restrictions on South Korean firms that do
business in North Korea.
Author Contact Information
Dick K. Nanto
Mark E. Manyin
Specialist in Industry and Trade
Specialist in Asian Affairs
dnanto@crs.loc.gov, 7-7754
mmanyin@crs.loc.gov, 7-7653
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